How a convertible loan note converts
A convertible loan note is a loan that is meant to turn into shares instead of being repaid in cash. It usually converts automatically when the company raises a qualifying financing, such as a next equity round in which new investors put in a minimum amount (one law firm's example is £1 million). The amount that converts is the loan plus any interest that has built up, and the number of shares is that amount divided by the conversion price.
The conversion price is normally the better of two prices for the noteholder. The discount price is the new round's share price less the discount, which one UK law firm says typically runs from 10% to 20%. The cap price is the price the note would pay if the company were valued at the valuation cap, which protects the investor if the company grows quickly. The calculator takes whichever price is lower.
Worked example: a £150,000 note converting in a £1.5 million round
A £150,000 loan note carries 8% simple interest and converts after 12 months, so £12,000.00 of interest has built up and £162,000.00 converts. The note has a 20% discount and a £4,000,000 valuation cap. The company has 1,000,000 shares, and the round values it at £6,000,000 before £1,500,000 of new money. The pre-money valuation counts the shares the note converts into.
The cap price is £4.00 a share, which is below the discounted round price, so the note converts at £4.00 and the noteholder is issued 40,500.00 shares. The round price is £5.77 a share, and new investors receive 260,125.00 shares for their £1,500,000. After the round the noteholder owns 3.11%, new investors own 20.00% and the existing holders own 76.89%. Before the new money the noteholder would hold 3.89%. The round values the company at £7,500,000.00 after the investment, and the noteholder's shares are worth £233,541.57 at the round price, 1.56 times the £150,000 lent.
Discount or valuation cap: which one applies
Both terms are tested and the one that gives the noteholder more shares wins. With no cap, a 25% discount and a £5,000,000 pre-money valuation, the same £162,000.00 converts at a price that is 25.00% below the round price, and the noteholder ends with 3.32%. With a £2,500,000 cap, a 15% discount and a £8,000,000 pre-money valuation, the cap price of £2.50 applies and the effective discount is 66.72%, which gives the noteholder 5.12%.
The cap only helps the noteholder when the round values the company above it. A higher cap, or no cap, leaves the discount to set the price. The calculator names the term that set the price, so you can see which one is doing the work.
Interest: simple or compounded
Interest is often absent or limited in UK loan notes, because the discount is meant to compensate the investor, and some investors ask for interest to be paid on conversion as well. Where it is included, it is added to the amount that converts, so it creates more shares and more dilution for existing holders.
A £250,000 note at 10% for 30 months converts £312,500.00 with simple interest (£62,500.00 of interest). Compounded yearly it converts £317,264.68, which is £67,264.68 of interest. Check your note for how interest is calculated and whether it converts at all.
What this estimate leaves out
This is a planning estimate for a single note converting in a single round. It does not model several notes, an increase in the option pool, a maturity date that arrives before a round, repayment instead of conversion, or shares rounded down to whole numbers. Notes differ in how the cap price, the interest and the qualifying financing are defined, so the note itself decides. One UK law firm points out that a convertible loan note is not appropriate if investors want SEIS or EIS relief, and that interest may have withholding tax implications, so take tax and legal advice before signing.
For a government-backed Start Up Loan, use the start up loan calculator.
To compare with an ordinary term loan, use the business loan calculator.
Use the right country page
This page stays in pounds and uses UK terms: convertible loan note, loan note holder and a qualifying financing. The country choices above the inputs open separate local pages. Choosing United States opens the convertible note calculator, which uses dollars, convertible notes and a post-money SAFE option. The inputs reset and amounts are not converted.
Inputs for the convertible loan calculator
Pre-money valuation counts
Whether the converting shares sit inside the round's pre-money valuation or come on top of it.
Interest
Simple interest, or interest compounded yearly, on the loan note amount.
Loan note amount and interest rate
The money lent and the yearly interest rate. Enter zero for a note without interest.
Months until the round
How long the note is outstanding before it converts. Interest builds up for this time.
Discount and valuation cap
The discount to the round price and the highest valuation at which the note converts. Enter zero for none.
Pre-money valuation and new money
The valuation agreed for the round before the new money, and the cash new investors put in.
Shares in issue before the round
Every share and option counted in the capitalisation before the note converts.
CALCULATOR QUESTIONS
UK convertible loan note calculator questions
How do you calculate the shares a convertible loan note converts into?
Divide the loan plus accrued interest by the conversion price. £162,000.00 converting at a £4.00 cap price gives 40,500.00 shares.
Does the discount or the valuation cap apply?
The one that gives the lower conversion price, because it gives the noteholder more shares. In the worked example the £4.00 cap price beats the discounted round price.
Does interest convert into shares?
It can. Where the note rolls interest up, it is added to the amount that converts, so £12,000.00 of interest on £150,000 increases the converting amount to £162,000.00. Some UK notes carry no interest or pay it only on repayment.
What does the noteholder own after the round?
In the worked example the noteholder owns 3.11% after the round, new investors 20.00% and existing holders 76.89%.
Does the calculator round the number of shares?
No. It shows the exact result, such as 40,500.00 shares. A real conversion usually rounds down to whole shares, as the note provides.
What happens if I change country?
The United States option opens the separate convertible note calculator, in dollars, with a post-money SAFE option. Your inputs are reset rather than converted.